State of Microfinance in Afghanistan

Transcription

1 State of Microfinance in Afghanistan Prepared for Institute of Microfinance (InM) As part of the project on State of Microfinance in SAARC Countries By Maliha Hamid Hussein 2009

2 Disclaimer Any opinions expressed and policy suggestions proposed in the document are the author s own and do not necessarily reflect the views of Institute of Microfinance (InM). The report also does not represent the official stand of the Government of the countries studied. 2 State of Microfinance in Afghanistan

3 List of Abbreviations AFSG AKF AKRMP ARTF BRAC CFA CGAP DaB DFID FMFBA FINCA GDP I-ANDS MADERA MFI MISFA NVRA OSS PAR SAARC SHG UNODC WOCCU WWI Ariana Financial Services Group Aga Khan Foundation Aga Khan Rural Microcredit Program Afghanistan Reconstruction Trust Fund Bangladesh Rural Advancement Committee Children s Fund, Afghanistan (program of Christian Children s fund) Consultative Group to Assist the Poor Da Afghanistan Bank Department for international Development (UK) First Micro-Finance Bank Afghanistan Foundation for International Community Assistance Gross Domestic Produce Interim Afghanistan Development Strategy Mission d Aide au Development des Economies Rurales Micro Finance Institution The Microfinance Investment Support Facility for Afghanistan National Vulnerability and Risk Assessment Operational Self-Sufficiency Portfolio at Risk South Asian Association for Regional Cooperation Self-Help Groups United Nations Office on Drugs and Crime World Council of Credit Unions Women for Women International Institute of Microfinance (InM) 3

4 Table of Contents Chapter 1: Introduction and Objectives 6 Overview 6 Country Background 6 Chapter 2: History of Microfinance 9 Overview 9 The Informal Economy 9 The Growth of the Formal Micro-Finance Sector 10 The Models of Micro-Finance in Afghanistan 11 Strategies of Leading MFIs 14 Types of Products and Services 16 Chapter 3: Growth and Outreach 19 Client Outreach 19 Coverage 20 Female Clients 23 Savings 24 Chapter 4: Sustainability 26 Operational Self-Sufficiency 26 Productivity of the Sector 28 Interest Rate Policy 28 Portfolio Yields 29 Portfolio Quality 29 Client Drop-Out 31 MISFA: The Whole Sale Lending Apex 31 On-going Donor Funded Initiatives in Support of the Microfinance Sector 32 Chapter 5: Demand for Microfinance Services 35 Chapter 6: Impact 38 Overview 38 Impact on Women 39 Impact on Poverty 40 Chapter 7: Regulatory Frameworks 41 4 State of Microfinance in Afghanistan

5 Chapter 8: Challenges Facing the Sector 43 Overview 43 Weak Management and Implementation Capacity 43 Portfolio at Risk 43 Sustainability 44 Limited Source of Financing 44 Ability to Attract Foreign Financing 45 Narrow Product Range 45 Re-examination of Delivery Strategies 45 Outreach to Rural Areas 46 Impact on Poverty 46 Impact on Gender 46 Strengthen Capacity of Support Organizations 46 AFS (Ariana Financial Services (Mercy Corps) 80 AMFI (Afghanistan Microfinance Institution) (CHF International) 82 ARMP (Afghanistan Rural Microcredit Programme (Aga Khan Development Network)) 84 BRAC - AFG (BRAC Afghanistan) 86 CFA (Child Fund Afghanistan (CCF)) 88 FINCA AFG (FINCA Afghanistan) 90 MADRAC (Microfinance Agency for the Development and Rehabilitation of Afghan Communities) 94 MoFAD (Micro Finance Agency for Development (CARE)) 96 OXUS AFG (OXUS Afghanistan) 98 Parwaz (Parwaz MicroFinance Institution) 100 Sunduq (Khadamati Mahally Sunduq) 102 WOCCU - AFG (WOCCU Afghanistan) 104 WWI - AFG (Women for Women Afghanistan) 106 Institute of Microfinance (InM) 5

6 Chapter 1: Introduction and Objectives Overview The Institute of Microfinance (InM) has undertaken the task of publishing reports on the state of microfinance in different regions. Each year, InM will prepare a document on the state of micro finance in different regions. In 2009, the Institute will publish a report on the State of Microfinance in the SAARC countries. This series will include seven country reports on each of the SAARC countries. This report on the state of the Microfinance Sector in Afghanistan is part of this first series of reports. This report will attempt to provide an overview of the state of micro finance in Afghanistan from both the demand and supply side up to the end of December The report is based on secondary information and much of the information reproduced here has been provided by the MicroFinance Investment Support Facility for Afghanistan (MISFA), the MIX Market, independent researchers, reports produced by the MFIs themselves and the donor agencies supporting the sector in Afghanistan. The report includes an analysis of the impact on the sector based on published information and review of case studies. Interviews were held with some of the representatives of selected MFIs and MISFA for a more in-depth discussion of some of the key issues. 1 Country Background Afghanistan is one of the poorest landlocked countries in the world affected by a conflict that has lasted for more than 20 years. Estimates of current population vary between 24 million 2 and 30 million. 3 Afghanistan is a rural economy with about 77% of the population living in rural areas. Agriculture has been traditionally the major activity for a large proportion of the population but the sector has suffered from 25 years of conflict, destruction of its infrastructure, low investments and natural disasters. Afghanistan has among the lowest kilometres of road per square km and only 16% of the roads are paved. About half of the rural population lives in areas inaccessible for part of the year. There is a lack of adequate levels of health and education services. The authority of the Government and its capacity for governance are very limited outside the capital Kabul. Although the Central Government appoints Local Governors, its influence and law enforcement is very restricted. Many areas of the country are still under the control of Taliban militant groups and warlords, thus out of reach of assistance. Lack of security in the country has severely limited economic growth and development. However, since the overthrow of the Taliban, there has been an improvement in economic prospects partly as a result of the influx of development assistance. According to the IMF the Afghan economy has grown at a rate of 11.4% per year in real terms since The IMF projected that the real growth was likely to increase to 13% in This strong growth can be attributed to the reconstruction efforts fuelled by development assistance 1 MISFA, BRAC, MOFAD, WWI, Ariana, FINCA, etc. 2 Afghan Central Statistical Office, World Bank, WDI State of Microfinance in Afghanistan

7 and the recovery of the agriculture sector. From 2001/02 to 2005/06, per capita income increased 2.5 fold from US$123 to US$300. Agricultural production is the main source of rural livelihoods and despite a severe drought from 1998 to 2004, agriculture has been the main driver of economic growth. The contribution of the sector to GDP has steadily increased from 36 percent in 2005 to 53 percent in Livestock activities are an integral part of most farming systems in Afghanistan. Previously, the livestock subsector accounted for 40% of total export earnings. About 50 percent of the livestock herd was lost between 1997 and Nowadays it is estimated that livestock numbers have decreased to about half the level of a decade ago due to the prolonged drought, declining feed, overgrazing of rangelands and poor animal health. The smallest and poorest farmers, who formerly kept at least one cow to provide for their subsistence, do not own any animals. Disease problems are being only partially contained. Rangeland is overgrazed; nomadic and semi sedentary shepherds are experiencing high livestock mortality rates. Many herding communities like the Kuchi are in danger of losing their transhumance lifestyle because the prolonged drought has led to a virtual depletion of their livestock. Improvements in the small ruminant sector, even in normal times are hampered by traditional user rights and grazing practices. The small poultry flocks - almost exclusively owned and managed by women - have diminished in many households. Fears about bird flu have contributed to a further reduction of poultry. Unaccounted by official statistics, Afghanistan is presently one of the largest opium producers of the world. UNODC estimated that 47% of Afghanistan's GDP came from growing poppy and illicit drugs in the period 2004/2005. The I-ANDS states that opium is central to household and national income and 40%-50% of the GDP derives from it. UNODC 5 reports that the total area under opium poppy cultivation in 2006 increased by 56% compared to 2005 and is expected to increase further. 6 About 200,000 households are involved in poppy cultivation whereas an additional 15,000 people participate in drug processing and trafficking. Many more tend to benefit from indirect effects such as employment in construction and trade financed by drug profits. Opium cultivation has become a major strategy for coping with the growing burden of rural debt and landlessness, as well as with food shortages. Given the lack of water and water management, opium is also economically attractive because it is more drought resistant than other crops. Poverty measurement in Afghanistan is severely constrained by lack of data. It is difficult to reliably estimate income or asset poverty. Periodic estimates of food security have been used as a proxy for poverty headcount ratio since food insecure households tend to be poor. The National Vulnerability and Risk Assessment (NVRA) 2003 estimates that 3.5 million people are extremely poor and 10.5 million are moderately poor. The I-ANDS indicates that over 21% of the rural population lives in extreme poverty and faces food insecurity. A total of 38% rural households (about 6 million of Afghans) face chronic or transient shortage of food. Poverty in Afghanistan appears to be a multi-faceted phenomenon, involving low assets (physical, financial and human), a long period of conflict insecurity and drought, poor infrastructure and public services. The Human Development Index (HDI) 4 Islamic Republic of Afghanistan, National Development Strategy ( ), UNODC (2007), Afghanistan Opium Winter Rapid Assessment Survey, February UNODC (2006), Afghanistan Annual Opium Survey Report and UNODC (2007), Winter Rapid Assessment Survey, February 2007 Institute of Microfinance (InM) 7

8 value (0.346) ranks Afghanistan 173 out of 178 countries worldwide 7. Over 80% of the population is illiterate. Life expectancy at birth is under 45 years. However, despite extensive damage to the production system caused by the war and fluctuations in the annual rainfall, Afghans have been resourceful at maintaining a minimum level of calorie intake by relying on social networks, migration, and cultivation of drought-resistant cash crops (opium poppy) as a livelihood option. 7 Afghanistan is ranked close to the bottom of the HDI index, followed by five African countries: Burkina Faso, Burundi, Mali, Niger and Sierra Leone. 8 State of Microfinance in Afghanistan

9 Chapter 2: History of Microfinance Overview The history of banking in Afghanistan bears the marks of decades of war which had led to the collapse of the formal banking system in Afghanistan. Microfinance services in Afghanistan are currently provided by three sources (i) formal institutions, such as banks (ii) semiformal institutions, such as non-governmental organizations (NGOs) and (iii) informal sources such as moneylenders and shopkeepers. The six state owned banks which had been operating in Afghanistan prior to the war had stopped their operations though they still exist legally and have some assets. Before the end of the war, the banking sector in Afghanistan was merely operational and formal economic activity in the country was minimal. Without functioning commercial banks, the country depended on the traditional Hawala system for money transfer which was the only effective payment system in place, and the informal credit market which met the demand for liquidity. With the fall of the Taliban regime in late 2001, and the creation of a democratically elected Government, key changes were made to reinvigorate the banking sector. The Government introduced new financial sector legislation in 2002 for strengthening Da Afghanistan Bank (DAB) for monetary control and banking supervision and in establishing a commercial banking sector. At Present there are 15 licensed banks in the country including three state owned banks, seven private sector banks and five foreign banks. 8 While Da Afghanistan Bank still offers some commercial banking functions, these activities are being phased out as the commercial banking sector adds capacity. The Banking sector has gradually been offering the full spectrum of services. The Banking sector has also created an apex body called the Afghanistan Banking Association in 2004 to represent member banks for the protection of its interest and lobbying for it in dialogues with the DAB. In addition, there is one leasing company and two insurance companies which have recently started operations in Afghanistan. However the provision of financial services by the formal sector is limited to urban areas and the informal sector, most notably the Hawala dealers still meet most of the transfer and remittance service needs in the country. The Informal Economy The World Bank estimates that between 80% and 90% of the economic activity in Afghanistan occurs in the informal sector, and almost all credit and other financial transactions are still carried out in the informal sector. 9 Four kinds of agricultural credit arrangements for small and poor farmers are prevalent in Afghanistan. Anawat involves short selling of commodities for cash loans, a system that is sometimes used by shopkeepers. Commodity credit is the delayed payment for commodities purchased from shopkeepers and traders. The third and most common form of credit is from family and kinship group sources. The fourth system is called salaam and is the credit system most widely used by opium traders. It involves the advance sale of produce at negotiated prices, often before planting season but also later on in the crop cycle. 8 Hussein, Maliha H. Review of the MicroFinance Sector in Afghanistan for the Appraisal of the Rural Microfinance and Livelihoods Support Programme. International Fund for Agriculture Development. November Rasmussen, Steve. The Current Situation of Rural Finance in Afghanistan. The World Bank Institute of Microfinance (InM) 9

10 The largest informal sector financial service provision system in Afghanistan is the hawala system, and while it is not a major provider of agriculture credit to small farmers, the hawala system provides money services that play an important role in the economic life of the country and in the opium economy, more so in the absence of a developed formal sector. Da Afghanistan Bank has introduced legislation to supervise the hawala system and other providers of money services, though supervision will need to take a pragmatic approach, accounting for the importance of the informal sector and the significant amount of time it will take for the formal sector to make access available to most people. The Growth of the Formal Micro-Finance Sector At the end of 2001, Afghanistan s formal financial system was virtually non-operational, with insolvent public financial institutions, and no private banks. Hence, dependency on informal sources of finance (such as family and friends, moneylenders and shopkeepers, traders, and landlords) increased. Microfinance programs had limited outreach (approximately 10,000 clients at the end of 2001) and weak institutional structures. Savings services were limited to a few informal schemes and in-kind saving such as opium in poppy-growing areas. In 2002, there were estimated to be about 500 NGOs working in Afghanistan of which 20 to 25 were providing some kind of credit services, though half of those had tiny programs that were not designed to be sustainable. 10 These achieved limited outreach and low sustainability due to a handout approach, hyperinflation and interest rate caps imposed for religious reasons. The World Bank and prominent members of the new Afghan government joined forces to establish a single mechanism for channeling what was hoped would be major investments in a new, rapid-growth microfinance industry. The Microfinance Investment Support Facility for Afghanistan (MISFA) was established as an apex institution in 2003 and was funded via the World Bank's Afghanistan Reconstruction Trust Fund (ARTF). CGAP was brought on board to provide microfinance technical expertise. This mechanism has helped to coordinate donor financing, encourage international and local NGOs to enter the microfinance sector and to help meet the growing demand in the sector. MISFA was recently transformed from an entity within a government program to an Afghan company with limited liability. Now, it is a non share holding company owned by the Ministry of Finance (MoF) and governed by an independent Board of Directors. This provides MISFA with more autonomy to attract new donors and to retain the involvement of those that continue to provide funding directly to government in order to continue to stimulate the expansion of the microfinance sector in the country. The objectives for which MISFA was created included the following; (i) co-ordinate donor funding so that the conflicting donor priorities endemic in post-conflict situations do not end up duplicating donor efforts and distorting markets; (ii) help young microfinance institutions scale up rapidly by offering performance-based funding for operations and technical assistance; and (iii) build systems for transparent reporting and instill a culture of accountability. In short, MISFA was expected to fast track MF development by making the best use of 10 Rasmussen, Steve. The Current Situation of Rural Finance in Afghanistan. The World Bank State of Microfinance in Afghanistan

11 limited public funds over a limited period of time to invest in institutions that would become sustainable, grow further without requiring more subsidies, and help make a transition from international organizations with microfinance expertise to Afghan organizations with local staff. While most donor agencies providing financing to the sector channel their funds through MISFA, there are some like the USAID and a few other donors who are providing direct funding to some MFIs. However, the volume of direct financing to MFIs is small and most of the donor agencies prefer to go through the Apex. MISFA is currently the main source of financing for the micro-finance sector. The number of MFIs supported by MISFA has grown from only 3 in 2003 to 15 at the end of December MISFA s partners include 13 NGOs, one credit union and a micro-finance bank. While most microfinance institutions were originally set up by experienced international NGOs, they are in the process of becoming companies under Afghan law. The Models of Micro-Finance in Afghanistan The models of micro-finance being used in Afghanistan have all been imported from experiences gleaned elsewhere. There are few models which have developed indigenously in the country. The predominant models combine the group lending approach with individual lending. Some also use the solidarity group lending Figure 1: Types of Delivery Methodologies model. While one or two organizations have experimented with Self Help Group models these have not really taken off in Afghanistan. The membership approach is being used in the establishment of member owned credit unions. However, this membership model is being used in a limited manner and it is too early to say if this model will work in Afghanistan and be taken to any significant scale. Most MFIs are attempting to use the group methodology and within that the solidarity group such as BRAC or village organizations such as the Afghanistan Rural Micro- Credit Programme (ARMP). An innovative seed bank idea was also tried by the International Center for Agricultural Research in the Dry Areas (ICARDA) in Afghanistan. Figure 1 below outlines the different delivery methods being used in Afghanistan and this illustrates that the full spectrum of arrangements is being tried in the country. Institute of Microfinance (InM) 11

12 Individual lending is defined as the provision of credit to individuals who are not members of a group that is jointly responsible for loan repayment. 11 This methodology is used by at least 8 MFIs in Afghanistan, as well as by all banks. It requires frequent and close contact with individual clients in order to provide products tailored to the specific needs and cash-flow of the business; therefore the loan officer to client ratio is much lower than it is for group lending. In Afghanistan, individual loan sizes range from $120 - $6000, depending on the need of the client and the experience of the MFI in lending to that type of client. An analysis of cash flow and simple debt to income ratios are often used to determine the clients ability to repay. Normally a client begins taking out smaller loans and as the clients build their credit history, asset base, and relationship with the lending institution they increase their access to larger loans. The issue of collateral affects this type of loan most. The poor legal infrastructure and problems of land titling have restricted the ability of lending institutions to provide loans in large amounts. A trust relationship and strong repayment record are the primary guarantees for individual lending until mechanisms for contract enforcement and improved land title records are available in Afghanistan. The need for frequent and close contact with clients is one of the major challenges for financial institutions trying to reach rural clients; both weak infrastructure and increased administration costs add to the cost of individual lending programs for farmers, wholesalers, rural traders, and others in rural areas. This is the type of credit, which is considered the most desirable by borrowers, and is most requested. The security of the area and the availability of transport directly impacts access issues. One of the earliest approaches used in Afghanistan for the delivery of credit, although a few still practice this approach is that of combining it with an integrated development programs and use a combination of technical assistance, agriculture inputs, credit mechanisms, and community development activities to assist a specific population, usually to respond to a specific social need such as food security, agricultural development, or women s empowerment. The credit products generally develop out of a perceived need not for credit specifically but as one piece of a development program. This makes them weak in some aspects but useful as examples of interventions that may be able to be adapted and used as a response to the needs identified in Alternative Livelihoods analyses. Approximately nine organizations in Afghanistan are currently doing credit or grant finance activities that are designed as a complement to a non-financial activity. These financing activities may or may not follow best practices in lending, and sometimes blur the lines between grant and loan products. Often these programs were created because no MFI existed in the area of operations, or existing MFIs were unable or unwilling to meet the financing needs of the population targeted by the program. The financing structures that are established as a result are generally not sustainable. This model has the advantage of ensuring that technical assistance and marketing needs of the borrower are met -- making it more likely that borrowers will be able to enter new markets and create successful businesses. However, it is the least sustainable, as these activities have a high-cost that cannot normally be covered by the fees and interest collected by an MFI. In many cases, no fee is being charged for any services (credit provision, technical assistance, marketing) meaning that the activity will only function as long as donors or the government supports it. 11[11] Sustainable Banking with the Poor: Microfinance Handbook -- An Institutional and Financial Perspective, Joanna Ledgerwood, World Bank, State of Microfinance in Afghanistan

13 Group lending methodology is being used by financial institutions in Afghanistan fairly frequently. Group lending approaches involve the formation of a group with a fairly homogeneous need for credit in terms of loan size and term, although the loan uses within a group are normally varied to decrease the risk of default for the group overall. In Afghanistan, group sizes vary from 4-20 members, who act as a guarantor for the loans of all members of the group. In case any member of the group cannot make a repayment, the other members of the group must repay on that person s behalf. Loans under this methodology tend to start small and have short repayment periods. The range in Afghanistan runs from $85-$600, increasing with each loan cycle. Groups with a good repayment history can continue taking loans of increasing size and duration; and several programs in Afghanistan allow borrowers to graduate from group lending to individual lending after a certain number of cycles. One of the greatest advantages of this loan product is that peer pressure acts as the loan collateral. When one member is unable to repay, further lending to all members is normally stopped. Therefore, moral hazard is decreased by group members that are risk-averse and those who want to protect their individual borrowing capacity. Group lending also can help decrease administrative costs, as several loans are managed by the group leader. The greatest advantage of using this type of loan to respond to the credit needs of poppy cultivators is that MFIs using this methodology have, in a very short period, been able to set up operations in a large number of districts and provinces. However, the small size of the loan, especially in the initial stages, limits the investment and income creation opportunities. There are four organizations implementing programs that utilize the Village Banking methodology. Village Banks are community-managed savings and loan associations established to provide access to financial services in rural areas. Membership usually ranges from members and the bank is financed by mobilization of members savings in addition to seed capital, which all members agree to be liable for. 12 A Village Bank has a management committee that determines the loan procedures, amounts, and terms. Member s savings are usually tied to loan amounts and savings are used to finance new loans or collective income-generating activities. The key distinction of this lending product is that a community group determines who receives loans, under what conditions the loans are provided, and for what purpose the loans can be used. This model has been limited by the amount that can be mobilized in a community, and may not be useful in areas that have a limited ability to save due to high debts or low asset base. Concerns about levying interest as un-islamic have further limited the expansion of this model in Afghanistan. WOCCU 13 is the apex organization of the international credit union system which is assisting with the setup of credit unions here in Afghanistan. Unlike banks and micro finance institutions, credit unions are formed and owned by their members. Only owner-members have access to the savings and loan services provided by each credit union. Awards for Savings are 8% per annum. The loans have a service charge of 2% per month. WOCCU has received USD 19.4 mn and USD 8.3 mn funding from USAID and MISFA respectively to expand its presence 12[ Microfinance Handbook: An Institutional and Financial Perspective, Joanna Ledgerwood, World Bank, WOCCU is the world s largest development agency for Credit Unions. It has credit union members in 92 countries with 42,705 credit unions affiliated to it. Together, they hold savings of USD 764bn and have a loan portfolio of USD 612bn. The total credit union membership is of 157 million and together they hold assets USD 894 bn and reserves worth USD 91bn. Institute of Microfinance (InM) 13

14 in Afghanistan. The USAID funding will be used to set up 20 credit unions and points of service, designated as Investment and Finance Cooperatives (IFCs) in Northern, Southern and Eastern Afghanistan. This funding is part of USAID s USD 80 mn support to the Academy for Educational Development s (AED) Agricultural, Rural Investment and Enterprise Strengthening Program (ARIES). This ARIES program aims to convert back into productive cultivation those farmers who have lapsed into opium cultivation in this conflict-ravaged region. WOCCU, which is associated with AED, will receive USD 15.4 mn as a grant and the remaining USD 4 mn will be in the form of a convertible subordinated debt to equity investment in the project IFCs. The Investment and Finance Cooperatives being set up in Afghanistan are expected to run as per Islamic Banking Principles. The Aga Khan Foundation (AKF) and the Natural Resources Institution (NRI) supported by the Research in Alternative Livelihoods Fund (RALF) programme have on a pilot basis established Self Help Groups (SHG) as an alternative approach to microfinance provision for the poor in Badakhshan province. The project is based on the voluntary formation of community level SHGs in villages. The experience of this program shows that the loans provided through the Self Helping Groups can, at least in part, replace informal and formal credit sources that have high service charges. Affordable credit through the SHGs can lead to viable opportunities to start or expand income-generation activities that reduce dependency on poppy and improve the livelihoods of rural Afghan families. There was ample demonstration that the SHGs themselves own and understand the process and make all the key decisions about the management of the Groups and their finances themselves. The regular monthly meetings contribute to social cohesion, and provide a forum for discussion of positive developmental opportunities. Of particular importance in this model was the report that this model helped in the empowerment of women through the formation of women s SHGs. The SHG model is less threatening to religious and vested financial interests than other forms of finance. However, this model has not been taken to scale. In Afghanistan a few organizations have tried the concept of Seed Banks which is a credit mechanism that allows farmers to borrow seed and fertilizer before planting, and repay the value of these items either in cash, wheat seed, or wheat grain after the harvest. This mechanism was initially used to introduce high quality wheat in rural areas in order to increase yield. The Seed Banks are considered successful both by borrowers and program managers, and have created the conditions for Village Banks to be developed out of the community mechanisms used to manage the Seed Bank activities. The methodology is that a shura or specially created village organization is given (as a grant) a predetermined amount of wheat seed and fertilizer. This amount normally represents 25-75% of the seed requirements of the community. The shura determines on what terms and which families will receive the loan of seed and fertilizer. Some programs require only the seed to be repaid; others require the total value of the package to be repaid. Some ask for voluntary additional contributions after harvest, others have no additional cost for the borrower, or require only partial repayment (50%). In some of the very successful seed banks, shuras have chosen to liquidate excess seed in the bank in order to purchase community assets such as a tractor. This type of credit is also sharia-compliant, making it attractive in conservative areas. Strategies of Leading MFIs Today BRAC Afghanistan is the largest in terms of its client outreach, geographic coverage and staff strength. BRAC began its operations in Afghanistan in response to the conflict in Afghanistan and the flood of returning refugees in It is implementing a holistic strategy developed in Bangladesh which has been adapted to suit 14 State of Microfinance in Afghanistan

15 the local context. BRAC has established a small training centre through which it trains its rapidly growing staff. Currently 95% of the 1,985 BRAC Afghanistan staff in the microfinance sector is Afghani and 1,104 are women. The NGO has also recently established a separate BRAC Afghanistan Bank (BAB) which is a commercial Bank with its headquarters in Kabul. The First Micro Finance Bank in Afghanistan is the largest MISFA partner in terms of the volume of funds disbursed. It was established by the Aga Khan Agency for MicroFinance. (AKAM). The Bank provides credit and saving products as well as domestic and international payment services. It focuses on micro-enterprises and small businesses. Beginning in Kabul and urban centres in the northeast of the country, the Bank will gradually expand to urban and rural areas of Afghanistan, with a view to opening 14 branches in the next three years. The Aga Khan Development Network (AKDN) has also been implementing credit programmes through the Afghanistan Rural Micro-Credit Programme (ARMP), which provides a wide range of credit products to farmers and traders in rural provinces. Loans have allowed some farmers to repurchase land sold during civil strife to poppy farming landlords and warlords, replant the fields with wheat and potatoes and acquire livestock. There are plans to merge the operations of the ARMP into those of the FMBA. Given their very disadvantaged position and status, MFIs in Afghanistan give preference to women clients. Female headed households have the highest incidence of poverty 14 of all vulnerable populations they are more likely to be landless, do not have access to irrigated land, and have limited access to productive assets such as livestock. Female-headed households also have restricted access outside their compound and have limited formal entitlements to productive assets. The Afghanistan Rural Microcredit Programme (ARMP), Bangladesh Rural Advancement Committee (BRAC), Micro Finance Agency for Development (MoFAD), Parwaz and Women for Women (WFW), work exclusively with women clients in the field of small loans. Parwaz uses a cost-effective strategy to reach female clients by hiring part-time community agents, known as Promoters, who live in the community and have strong client relations. They host weekly group meetings and ensure high repayment and social networking. Each loan officer works with 2 community promoters and is able to reach as many as 600 clients. MADERA a French non-profit organization, working in Afghanistan for more than 16 years has also been implementing a micro-finance programme. It has tried to target farmers, during the last 10 years, in four provinces of Eastern Afghanistan. Some of its specific aims in the sector are to support rural economic development through access to credit, ensure the inclusion of the poorest in the system and to strengthen the capacity of communities to control their local development, through a community based management of the MFI and through integration of the micro finance activities in other developmental activities. 14 National Risk and Vulnerability Assessments Institute of Microfinance (InM) 15

16 Most partner MFIs provide microfinance services exclusively. In accordance with best practice, NGOs that traditionally integrated their financial and social services have started to distinguish between the two with MISFA support - in order to create independent and sustainable microfinance institutions. Only a few institutions have developed linkages between financial and non-financial services as a way to extend their social reach and impact. These institutions, such as Women for Women, FINCA and BRAC, which channels technical assistance on livestock to select clients, rely on alternate funding to integrate these programs. Women for Women target vulnerable women usually with no former business experience and limited productive assets to receive small grants, entrepreneurship training, business support and health education. Many of these women graduate into the institution s formal microfinance program. FINCA Afghanistan began its operations in Herat in 2004 and has now expanded to other parts of the country. The program focuses outreach on women, ethnic minorities, and returning refugees. FINCA Afghanistan is partnering with the International Rescue Committee (IRC) to link financial and nonfinancial services, enabling very poor Afghan households to overcome constraints to sustainable livelihoods. FINCA will offer financial services to new Afghan clients who will receive market-oriented skills training and business development support from IRC. In order to conform with Islamic principles, FINCA Afghanistan offers three core products: two solidarity group lending programs, the Women's Murabaha Group and the Market Murabaha Group, and a collateralized individual lending program, the Business Murabaha Agreement. Types of Products and Services There are only two services provided by the MFIs in Afghanistan; credit and savings. Within credit the type of product is fairly standard and is a one year or a seasonal loan which is repayable in regular instalments or in two block payments at the end of the harvest season. ARMP and OXUS are providing agricultural credit. The main loan product offered by the largest MFI BRAC is based on a solidarity group methodology with groups of four or five clients, primarily women, each one initially borrowing $ to be repaid in installments over a typical loan cycle of 4 to 12 months. Most MFIs allow good clients to graduate rapidly through subsequent loan cycles with increasing loan sizes. Some MFIs have also introduced another loan product that is for individually owned enterprises, primarily managed by men, with loan sizes between $250 and $2000 to be repaid in installments over a year or more. One or two MFIs such as FINCA have recently introduced non-interest bearing Murabaha Islamic loans or contracts where sellers declare their cost and profit. Only 1/3rd of the MFIs provide a voluntary savings product most require mandatory savings which is in this analysis not treated as a product but as a fee for access to credit services. 16 State of Microfinance in Afghanistan

17 BRAC Afghanistan The implementation of its programmes is facilitated by Village Organizations (VOs) and based on local community participation. Each VO has between 25 and 40 women members and hosts weekly meetings. Following consultations with village Shuras, BRAC staff approaches every household to join their VOs and enroll in the microfinance activities. BRAC s major microfinance product is a small loan programme with a loan size of between AFS 8,000 and 20,000 to be repaid in weekly instalments. Savings are compulsory and members receive benefits in the event of an unexpected death. Products Small Enterprise loans AFS 40,000 to 500,000 to be repaid within one year in monthly instalments. BRAC staff works closely with the entrepreneur in developing his business and keeping track of the cash flows. Agriculture and Livestock Development and Credit Support Program (ALDSCP) AFS 15,000 30,000 for Poultry, Livestock to be repaid in 12 equal monthly instalments. Alternative Livelihood Rural Finance Program (ALRFP) USD 15,000 20,000 for Agriculture, Livestock and others to be repaid in 12 equal monthly instalments. BRAC charges a 17.5% flat rate for loan provision services. As the microfinance sector grows, it is expected that it will begin to offer a broader range of financial services, such as savings, insurance, and housing loans, while also using technology such as mobile telephone networks to increase outreach and improve efficiency. Steps are already being taken to widen the range of financial service products in order to meet demand, including Islamic loan products, diversify MFI funding sources to include commercial funding, and expand small business lending by commercial banks and MFIs. In late 2006 MISFA opened an SME financing window for NGOs, thereby closing the middle gap for agricultural loans. Table 1 below outlines the products and services offered by each of the MFIs and their delivery methodology. Table 1: Approach Used by MFIs in Afghanistan MFI Approach Products and Services AFSG (program of Mercy Corps) AMI (program of CHF) ARMP (program of AKF) Solidarity groups of 4-8 Individual lending Group Lending Individual lending Individual Lending Group Lending Village Banking Credit Credit Credit Savings Institute of Microfinance (InM) 17

18 Microfinance Program of BRAC Afghanistan Village Organizations with subgroups such as solidarity groups Credit Mandatory Savings FINCA Afghanistan Group lending Individual lending Credit Islamic Products Group Savings MADRAC (program of DACAAR Group Lending Mandatory savings; Credit; Voluntary Savings MOFAD (program of CARE) Saving & Credit Groups Individual lending Group Savings; Credit OXUS Afghanistan Solidarity group Individual loans Credit (program of ACTED) Collective loans PARWAZ Group Guarantee Loan Individual Loan Mandatory Savings; Credit SUNDUQ (program of MADERA) Individual loans Small Enterprise Loans Collective loans Mandatory Savings Credit Voluntary Savings WOCCU Community Credit Unions Credit Savings Microfinance Program of WWI Group lending Credit First MicroFinance Bank Individual Loans Savings Limited Savings Source: Nagarajan, Geetha, Henry Knight and Taara Chandani and MFIs. 18 State of Microfinance in Afghanistan

19 Chapter 3: Growth and Outreach Client Outreach A review of the growth in the microfinance sector in Afghanistan reveals that there has been very steep growth in the number of clients and portfolio outstanding in the last three years. The rapid growth has been led mainly by two MFIs, BRAC and the First MicroFinance Bank (FMFB). While a few MFIs still operate without assistance from MISFA, the main sector players all go through the apex. MISFA client outreach in Afghanistan increased from a mere 12,000 clients serviced by 3 NGO-type MFIs with a portfolio outstanding of less than US$ 1.1 million in 2003 to 441,092 active clients at the end of December MISFA supported MFIs have 350,692 current borrowers with a current portfolio outstanding of over US$ 106 million. The cumulative loans disbursed by the MFIs since the inception of MISFA are US$ 557 million with a savings of US$ 14.6 million. Table 2 below provides the overall figures at a glance. Available data has been plotted and shown in Figure 2 below. The figure shows the steep climb in active clients between 2006 and The rate of growth has come down in the last year. Figure 2: Growth in Active Clients and Borrowers Institute of Microfinance (InM) 19

20 Table 2: MISFA Performance up to December 2008 Outreach Provinces Districts Active Clients 192, , , ,092 Active borrowers 160, , , ,692 Client dropout (cumulative) 69, , , ,663 No. of loans disbursed (cumulative) 321, , ,744 1,317,038 Amount of loans disbursed, $ (cumulative ) 71,536, ,409, ,331, ,240,936 No. of loans outstanding 160, , , ,904 Gross Loans outstanding, $ 27,623,763 51,653, ,927, ,373,056 Client Savings outstanding, $ 2,956,353 4,990,573 11,416,667 14,603,226 Coverage The geographic coverage of MFIs is indicated on the map of Afghanistan below. This shows that there is a concentration of service provision in the capital Kabul which has 40% of the clients and 39% of the portfolio. The Northern parts of the country also have 40% of the clients and 45% of the portfolio. However, there is very little coverage in the west and southern parts of the country. Large parts of the country receive virtually no coverage from the formal microfinance sector. The coverage by the informal sector has not been properly documented and there are no figures available on its outreach and volume. However, a recent study shows that only 5% of the demand among the bankable poor 15 is now serviced by the MFIs in Afghanistan, and only 8% of the estimated credit requirements are met by the MFIs measured by proportion of economically active population below the poverty line. 16 Nagarajan, Geetha, Henry Knight and Taara Chandani. October 18, State of Microfinance in Afghanistan

21 Figure 3: Geographical Coverage of the Formal MicroFinance Sector in Afghanistan Figure 4 below shows the growth in the loan portfolio outstanding. There was rapid growth in the volume of funds between 2006 and However, this curve seems to have flattened out in the last year. Between December 2006 and December 2007, MFIs in Afghanistan doubled clients and almost tripled portfolio outstanding in 12 months. There are now growing concerns 17 about the speed with which the sector has grown and many are skeptical about the claims of outreach made by some of the largest providers The PAR of both FINCA and MADRAC are areas of concern for MISFA.. 18 Local MFI leaders from WWI, MOFAD and Ariana are open in their criticism about BRAC Afghanistan and maintain that BRAC has given multiple loans to the same clients and question their numbers. Institute of Microfinance (InM) 21

22 Figure 4: Growth in Portfolio Like in most countries the sector is dominated by a few MFIs. Between them, BRAC, FMFBA, FINCA and ARMP serve 71% of the clients and have 73% of the portfolio. BRAC currently serves 43% of the total active clients and has 26% of the total volume of portfolio outstanding while the FMFB has 14% of the share of active clients and 33% of the outstanding loan portfolio. As can be seen from the figures below most MFIs have between 3000 and 20,000 active borrowers and only 5 offer savings products as can be seen from the difference in the number of active clients and borrowers. There are no insurance products on offer. FINCA and one or two others are experimenting with leasing but these have very limited outreach. This table covers the main players in the formal microfinance sector who operate through MISFA. A few organizations have received funding from USAID and a few other donors outside the MISFA umbrella. However, these are small in number and do not report to any self-regulating organization within the microfinance sector. Table 3: Total Active Clients and Borrowers by MFI in Afghanistan in 2008 MFI Active Clients Active Borrowers (%) Share of Active Clients (%) Share of Active Borrowers AFS 11,181 11, AMFI 3,896 3, ARMP 21,905 21, BRAC 188, , CFA 20,145 20, FINCA 38,499 38, MADRAC 18,148 16, MOFAD 15,156 11, OXUS 14,394 14, PARWAZ 12,180 12, State of Microfinance in Afghanistan

23 SUNDUQ 10,531 10, WOCCU 15,540 4, WWI 9,549 9, FMBA 61,162 36, TOTAL 441, , In loan terms of gross amount, a total of US$ was outstanding at the end of December The First Microfinance Bank has the largest share of the loan amount at 33% of the total followed by BRAC at 26%, ARMP 14% and FINCA 6%. The average loan size in the sector is USD 303 with the range varying form USD 133 to USD 972. Table 4 below gives the total loan outstanding by MFI and also provides details of the average loan size of each MFI. Table 4: Details of Loan Amounts of Afghan MFIs (September 2008). MFI Gross Loan Amount Outstanding (US$) (%) Share of Gross Amount Outstanding Average Loan Amount (US$) AFS 3,521, AMFI 763, ARMP 15,352, BRAC 27,310, CFA 3,366, FINCA 5,330, MADRAC 2,433, MOFAD 2,231, OXUS 3,763, PARWAZ 1,959, SUNDUQ 1,476, WOCCU 2,542, WWI 1,273, FMBA 35,046, TOTAL 106,373, Female Clients Female clients make up a major share of the borrowers. However as can be seen from Table 5 below the proportion of women clients in the sector has decreased somewhat in the last four years from 72% in 2005 to 63% Institute of Microfinance (InM) 23

24 at the end of December The data on the volume of loans extended to women is not available but MISFA estimates that this would be around 50%. 19 A major issue which has not been addressed in the sector in Afghanistan is regarding who is actually using the loans extended to women. There has been no serious attempt to investigate this issue. Like in Pakistan it is suspected that a large proportion of these loans are actually being used by the male members of the household. Table 5: Growth in Female Clients Outreach - Vulnerable Section Women Clients 139, , , ,719 Widow clients - 4,177 3,370 2,191 Disabled clients Returnee clients 3,114 11,316 13,174 13,872 Women as % of Total Clients 72% 74% 66% 63% Savings Savings is the forgotten half of microfinance in South Asia as a whole and in Afghanistan in particular. Only 60% of the sector institutions are involved with savings. However 40% of the organizations which collect savings require it as part of their lending methodology and require mandatory savings as collateral. Others only offer a group savings product which limits its potential attractiveness for clients because it destroys some of the most valued features of savings such as confidentiality, liquidity and convenience. Among the organizations which offer a savings product which is voluntary are the First MicroFinance Bank which does not cater to the poor or rural clients in any significant manner and WOCCU which has a small volume of the overall savings. The FMFB (53%) and BRAC (38) between them have 91% of the total savings of US$ 14 million. While the BRAC savings product is valued by some of its 155,000 members it is designed more to fulfill the purpose of collateral and social capital formation as opposed to a product which is highly valued by the client. The attitude of BRAC Afghanistan to savings is illustrated by the fact that savings is not even mentioned on its web site as a financial product when all other products are explained in great detail. 19 Discussion with Dale Lampe at MISFA. 24 State of Microfinance in Afghanistan